AppFolio, Loar Group, O'Reilly ICE vs EVs, MKL, Douyin, PDD & BABA, AMETEK, HLMA, Brockhaus, Johns Lyng

Published Last Week

1. AppFolio: IP Company Learning Journey

2. Douyin, PDD, Taobao, & JD: a Merchant Perspective

3. Loar Group: Pacific Piston Ring Company

4. O'Reilly vs Advance Auto Parts: Supply Chain Comparison

5. Markel: State National & Program Services

6. AMETEK: Culture & M&A Philosophy

7. Halma: Managing & Scaling Gas & Water Testing Divisions

8. Brockhaus Technologies, JobRad, BusinessBike: German Bike Leasing Market Dynamics

9. Johns Lyng Group: Reconstruction Experts Acquisition

AppFolio

This IP Company Learning Journey curates all our research on AppFolio, the $8.5bn market cap Property Management Software platform. IGSB helped incubate the company in 2006 and still owns 25% of the capital and ~46% of the votes. The company's forecasted revenue growth for FY24 is +20% with 25% GAAP EBIT margins.

Our research has focused on understanding the core workflows of managing rental properties, how APPF competes with incumbents, and the growth drivers and risks to its payment revenue. Given payment revenue is estimated to be ~60% of APPF revenue, we explore the threat of rewards platforms such as Bilt to ACH processing payment revenue in detail.

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Founded in 2021, Bilt Rewards is a no-annual-fee credit card and loyalty program that enables tenants to earn points on rent. The company has raised over $400m and is generating ~$20bn run-rate in transaction volume. In FY23, the company reported that its members represented over 4m rental units, around half of APPF’s current unit count.

Tenants earn points on both rent and non-rent transactions. A Former Director we interviewed, and one of the founding members of Bilt’s team, believes ~75% of transactions are rental payments. Tenants earn 1 point per $1 of rental payments. If members don’t make 5 non-rent transactions per month, they are limited to 250 points per month from rent. This is the Rent Rewards Program. If tenants make 5 non-rent transactions, which includes dining at 3x and travel at 2x points, they earn 1 point per $1 of rent plus the non-rent points. This is the Bilt Mastercard product.

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Selling points for rent is Bilt’s CAC. Bilt aims to cover losses on rent payments with non-rent interchange and other non-rent revenue. Although Mastercard waived interchange for rent, Bilt pays ~1c per point to merchant partners such as airlines and hotels. If members don’t use Bilt for non-rent transactions, the model is challenged. This is where the potential risk to APPF comes in. Bilt has cemented its place within the value chain between the tenant and landlord. Bilt’s positioning and pressure to earn non-rental income may pose a risk to AppFolio and other property management solutions.

In this AppFolio Learning Journey we explore in further detail how the payment flow works between tenants, Bilt, a PMS, and landlords in or out of the Bilt Alliance.

Loar Group: Pacific Piston Ring

This interview with a Former Director of Pacific Piston Ring Company, an operating subsidiary of Loar Group, discusses the quality of the business and sale process to LOAR. In 2020, Loar beat HEICO to acquire PPR, a manufacturer of sealing rings for Honeywell and other Tier 1s.

The company was founded in 1921 and has been supplying sealing rings for pneumatic systems for nearly a century:

We were probably a tier four supplier in the aircraft supply chain. Despite being a small business without any debt, we focused on what we excelled at, which was making sealing rings for pneumatic systems ranging in size from three-sixteenths of an inch to about 14 inches in diameter. We left the larger components to competitors like Airtomic and Precision. - Former Director of Pacific Piston Ring, Loar Group

A significant portion of the products sold to customers like Honeywell are part of its Vendor Management System, putting pressure on Pacific’s pricing, cash flow, and on-time delivery metrics:

Of our top 50 parts, if we were to lose Honeywell as a client, that would shrink our business by 60%. We both knew that. So, how can we work together? You need us, we need you. That's the conversation that would take place. Even when you mention, "This VMI thing, we have six people in our office, the rest are in a factory producing these rings. We're going to have to hire another person full-time just to monitor this, because the penalties if we don't are costly." It's just, "Well, this is how we need to do it. We have too many parts coming in here. This is how we have to manage it." You can see it from their side, too. Large companies, so many businesses. But it definitely was a struggle. - Former Director of Pacific Piston Ring, Loar Group

The interview goes on to discuss the ‘proprietary’ nature of Pacific Piston Ring’s portfolio, its pricing power, and how Loar operated the asset post-acquisition. We will be publishing more work on Loar’s portfolio over the next few weeks with an aim to understand the quality of its intellectual property.

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Douyin, PDD, Taobao, & JD: a Merchant Perspective

A Former Manager at Douyin, ByteDance, who is now a jewelry e-commerce merchant, discusses the merchant perspective of selling on Chinese platforms such as Taobao, Douyin, PDD, and JD compared to AMZN and Shopify.

There are also interesting insights into ByteDance's culture shift since the Former CEO left:

When I joined the company, it was very transparent. Zhang Yiming would hold all-hands meetings every two or three months, updating everyone on the company's progress. Each leader had to present their business segment. If anyone misrepresented their business growth, they would be corrected openly. It created a transparent ecosystem where everyone could discuss the truth, similar to the culture in Silicon Valley. However, after Zhang Yiming stepped down, for reasons related to the CCP or otherwise, the company changed significantly. I don't have an English word for it, but it's like no one speaks the truth anymore. - Former Manager at Douyin, ByteDance

O'Reilly vs Advance Auto Parts: Supply Chain Comparison

One way O'Reilly differentiates itself from competitors is through daily part deliveries to stores. This ensures availability across a wide range of SKUs.

One thing to note about O'Reilly is that if it was coming from that DC, or let's call it the regular DC, they get deliveries overnight, five nights a week...One thing that makes Advance different is that an average store only gets one or two deliveries per week from their DC. Instead of a broader number of SKUs, Advance has to carry a deeper selection of SKUs. For example, an average O'Reilly store might have $750,000 in inventory, which would equate to about 27,000 to 28,000 SKUs. An average Advance store might have the same dollar amount, $750,000, but they have to carry more of certain SKUs, like those A, B, C items. So they might only have 22,000 different SKUs with the same dollar amount. - Former Regional Director at O'Reilly Auto Parts

With electric vehicles gradually entering the secondary market, O'Reilly's logistics advantage may decline:

It actually requires some thought because EV vehicles have far fewer components. When you consider electric motors, they don't have all the issues that gas or compression vehicles do. For instance, in those vehicles, you have to worry about regular maintenance items like spark plugs, air filters, and oil filters. However, in an EV vehicle, none of those components exist. They have far fewer things that could go wrong and tend to last a lot longer. I'm not sure if it's going to add a tremendous amount. Actually, if you compare it to the last 20 years, the rate of parts needed will be slowing. There will be more parts due to new vehicles coming out, but if you compare the rate from the last 10 years to the next 10 years, I would say it's going to be a smaller percentage of growth. - Former Regional Director at O'Reilly Auto Parts

In this interview, a Former Regional Director at O'Reilly Auto Parts compares the company's supply chain to that of Advance Auto Parts.

Markel: State National & Program Services

In 2017, Markel acquired State National, the leading US insurance fronting company, for $919m. This interview with a Former Director at State National, who worked closely with the founder and CEO for nearly two decades, explores Markel’s Program Services business model.

The company pioneered the fronting business model which clips 5% risk-free coupons for lending its ‘paper’ to MGAs writing specialty policies:

There were other companies that were basically managing agents, known as managing general agents. Many of them are Lloyd's cover holders and such. They know how to price their product and how to pay claims, but they are not licensed and authorized to sell all these products. Sometimes, companies like State National needed an insurance company to do their collateral protection insurance. A couple of these companies would come to us and ask if they could borrow our paper, which is basically the slang for your license and authority. We agreed, allowing them to do that for 5% of all the written premium, and we would take no risk. - Former Director at State National, Markel

In FY23, Markel generated ~$3.7bn in GWP in its Program Services division, of which over $1bn is attributable to Nephila. The interview goes on to discuss the synergies and potential misaligned incentives between Markel’s Program Services and reinsurance divisions:

Markel realized that was another missing piece of what they owned. So, they purchased everything and allowed State National to continue its operations as before, with the same sales team and contracts. However, the immediate street talk was that Markel might be cherry-picking reinsurance projects and overseeing State National's operations. There was concern that Markel might not want to be transparent about their dealings with State National. There was also speculation that Markel was instructing State National to take on some risks in certain deals, with each being evaluated individually for profit potential. - Former Director at State National, Markel

AMETEK: Culture & M&A Philosophy

This interview with a Former AMETEK VP explores the company’s culture and M&A philosophy. This comment in comparison with Danaher’s operating culture is interesting:

There are no monthly operating reviews. There's one annual operating review, which they call the AoP, the annual operating plan. There's one annual strategy review. There's one annual talent review. Those are the only outside deliverables. So, coming from Danaher, where I was just going from executive meeting to executive meeting and filling out more DBS type countermeasures and forms, it was funny. When I got to AMETEK, after I did all the onboarding and visited customers and factories, all of a sudden, I realized my calendar was empty. And I was like, oh my gosh, it really is up to me. A very different operation. Even though they're both decentralized, AMETEK is super decentralized. They monitor it financially very closely. That's how they maintain a pulse on the operating units. - Former VP, AMETEK

The operating philosophy focuses on pushing pricing power which can put pressure on operating units dealing with customers:

I remember very clearly my last budget meeting with the CEO, the CFO, and everybody. I thought I explained everything very well. And no dice. The corporate controller, who is now the CFO, came up to me after that meeting. Bill Burke came up to me and said, "Frank was wrong. I understand exactly what you're saying. I see it. Frank just took a position and couldn't back down." And so basically, there's no path. The only way to get the budget approved is to put in a price line to drop right through the bottom line. - Former VP, AMETEK

Halma: Managing & Scaling Gas & Water Testing Divisions

This is the second interview in our series to understand the challenges Halma faced in the early 2000s and how the company reorganized its portfolio to drive 15%+ CAGR in FCF over the last 20 years.

One interesting insight is how Halma has always organised its portfolio so it remained around ~50 operating companies. It hasn’t changed in decades. The Former CEO added a second layer of management to limit his direct reports. Operating companies are managed by a Divisional Head who is managed by a Sector Team. This org structure also defines how much expertise is on the board of the operating company and the flexibility to react to underlying market changes. This structure is slightly different to other acquirers such as Lifco or Lagercrantz which have fewer layers of management:

I was involved when the sector planning was being done, and it was definitely based on the idea that by having a sector CEO, you add a new layer. So, Andrew would have several sector bosses reporting to him and sitting on the executive board. Then they have another tier below them. This adds one more layer across the whole organization. And the results speak for themselves; they keep delivering year on year. So, it must have worked to a certain extent. - Former Divisional Manager at Halma

We also discuss Crowcon Gas Detection, one of Halma's oldest and largest businesses. In the early 2000s, this Director was injected into Crowcon to turn the business around. We explore how Crowcon generates recurring revenue and the wider quality of Halma's gas and water detection businesses:

We have a very solid service business, but the leak detectors have no consumables. There's no consumable income at all. It's only a matter of how long they last before they need to be replaced. Palintest has a huge reagents business with very profitable margins, much higher compared to the instruments. Hydreka is much the same as Halma Water Management. I also managed the UV companies, which were a bit of an enigma in Halma. - Former Divisional Manager at Halma

Brockhaus Technologies, JobRad, BusinessBike: German Bike Leasing Market Dynamics

A Former Senior Executive at e-motion sheds light on the German bike leasing market dynamics. There seem to be limited scale economies due to concentrated component suppliers:

It's because there are no economies of scale. If you are a manufacturer and you buy 10,000 frames in Asia, or even build your own plant, the price difference between 10,000 or 100,000 isn't really significant. Additionally, there is a duopoly concerning the main components, brakes, and gears. You know, you have Shimano and one or two other players. They don't offer much better prices even if you buy three times the quantity.

Johns Lyng Group: Reconstruction Experts Acquisition

One of the main cultural challenges Johns Lyng Group faced when they acquired Reconstruction Experts (RE) was the difference in its org structure:

I think that the brand structure, the way Johns Lyng promotes all their brands as being really independent of each other while still working together, whereas RE had everything roll up under one umbrella. Johns Lyng really treats them as different brands with different managers and different, essentially, owners through their partnership model and really holds people accountable in that way. I think that was another thing that was difficult for the RE people to fully appreciate, especially with the smaller brands. I was really there with the Express brand, which handles repairs under $30,000. Traditionally at RE, that was the department that was just seen as a necessary evil. Whereas for Johns Lyng, it was really a part of their strategy to start with the Express brand and small-time repairs and works to really establish themselves and prove that the model worked. They gave a lot of care and attention to the smaller end of the works, the things that could be done quickly. It became a volume game versus picking out a $150 million project. Shifting resources to support the lower end of the market was another thing that I faced a lot of resistance on. Trying to get more resources onto my team was a challenge. - Former Operations Manager at Johns Lyng Group USA

In this interview, a Former Operations Manager at Johns Lyng Group USA sheds light on the difficulties the company encountered post-acquisition of Reconstruction Experts and how they tackled them.